How To Calculate Coverage Ratio

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How To Calculate Coverage Ratio
How To Calculate Coverage Ratio

Video: How To Calculate Coverage Ratio

Video: How To Calculate Coverage Ratio
Video: How to Calculate Coverage Ratio 2024, March
Anonim

When analyzing liquidity, which is understood as the ability of an enterprise to timely settle its short-term obligations at the expense of quickly sold assets, a number of coefficients are calculated. Among them, the current liquidity ratio or coverage ratio.

How to calculate coverage ratio
How to calculate coverage ratio

Instructions

Step 1

Coverage ratio characterizes the company's ability to timely repay current liabilities through the sale of current assets. This is the most common indicator that characterizes the liquidity of an organization. The higher its value, the more solvent the company is.

Step 2

This ratio shows how many rubles of the company's current assets fall on the ruble of short-term liabilities. In other words, it allows you to determine what part of the current liabilities of the company can pay off the current assets. Therefore, theoretically, an organization in which the level of current assets exceeds the level of short-term liabilities can be considered as successfully functioning.

Step 3

Coverage ratio calculation is pretty straightforward. It is defined as the ratio of current assets to current liabilities of the firm. At the same time, assets are understood as cash in the cash desk of the enterprise and in bank accounts, accounts receivable with a maturity of less than 12 months, the cost of inventories, other current assets, for example, short-term financial investments. But it should be remembered that not all assets indicated in the balance sheet are current. Some inventory balances or overdue receivables have zero liquidity. Current liabilities are understood as loans with the nearest maturity, obligations to employees of the organization, the budget, extra-budgetary funds, etc.

Step 4

The value of the coverage ratio, as a rule, is not the same in different industries. Its normative value is 2. A coefficient below the established level is considered critical. The increase in this indicator in dynamics is considered as a positive aspect and shows that the risk associated with the difficulty of selling the assets of the enterprise is decreasing.

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